Analysis On Why Ghana’s Public Debt Is Such A Problem

Ghana’s public debt as at June 2022 stood at GH¢393.4 billion (almost $40 billion) and equivalent to 78% of GDP. This figure is huge, but largely meaningless without the proper context. .

Every government has to borrow to finance its activities. It is not feasible for a government to wait for tax revenue or revenue from natural resources to flow into the treasury before it undertakes the critical task of maintaining infrastructure, paying public service workers, national defence, waste management and so on. Therefore government has to borrow from both domestic sources and foreign sources.

In Ghana, government borrows from domestic sources through the money market and the capital market. The money market is a fancy way of saying short-term securities such as treasury bills and the capital market involves long-term securities such as notes and bonds.

Ghana’s government also borrows from foreign sources through concessionary borrowing and commercial borrowing. Concessionary borrowing can best be described as cheap borrowing. This is when government borrows from multilateral organizations such as the World Bank, IMF, African Development Bank; or when it borrows from other nations such as Japan, USA or China.

These loans are usually at very generous terms because they come tied to a project or with many conditions that the government has to meet. Commercial borrowing on the other hand is where government borrows from private lenders who charge commercial interest rates.

Over the past 15 years, Ghana’s governments have taken large commercial loans (named Eurobonds) because they are able to borrow much more than they would get from concessionary borrowing and also because there are no restrictions on what they can do with the money.

The size of a country’s debt does not matter as long as investors are convinced that it can pay back the debt. That is why the USA has a debt to GDP of over 120% yet people are willing to buy US bonds with an interest rate of 3%. They simply believe that the USA will not default on its debt.

How Do Investors Know That You Can Pay Your Debt?

Some metrics that investors look at when examining whether a country can pay its debt includes interest payments to revenue, fiscal deficit and the primary balance. Interest payments to revenue is a measure of how much of a country’s revenue is going into paying interest on debts.

The higher the ratio, the less likely a country is to be able to repay its debts. This ratio is 55% in Ghana (as at June 2022) and 15% in the USA. This means that GH¢55 out of every GH¢100 generated by the government in tax revenue, natural resource sales or any other type of revenue was used to pay interest on debt. This is a critical level and represents a deterioration from the 34% in 2017 and 2018, the 38% in 2019, the 46% in 2020 and even the 49% in 2021.

Not surprisingly, foreign investors have become unimpressed by our debt sustainability and have therefore refused to lend us any more money. This came as a big blow to government as it had borrowed $3 billion in 2019, another $3 billion in 2020, and yet another $3 billion in 2021.

Credit rating agencies, who are institutions who rate the ability of various debtors to be able to pay their debts, downgraded Ghana’s debt (here, here and here) thus taking our debt out of consideration for many investors abroad.

With the lack of access to international markets, and foreign investors in the domestic market frantically selling their holdings and repatriating their earnings in dollars, the cedi has depreciated significantly and is now the second-worst performing currency in the world so far this year.

What Can Government Do?

In an ambitious move to raise tax revenue, government introduced the e-levy, a 1.5% tax on electronic transfers that has so far generated GH¢93 million compared to the GH¢1.4 billion envisioned.

Government has been forced to borrow more in the money market, thus raising treasury bill rates to 30% from 12.5% at the start of the year. On the capital market, investors have been unwilling to lend to the government long-term as they have lost confidence in the government’s ability to repay. This has led to the government canceling some planned bond issuances. With no other option, it wrote to the IMF, seeking funds and a program to restore debt sustainability.

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